Gratuity refers to the amount the employee receives from his payee against the services rendered by the employee. Gratuity is paid in case of any unfortunate event of accident or disablement, of the deceased. There are laws implemented by the state and federal governments of the country. In accordance with the Act of payment of Gratuity in 1972, there is a formula that helps to determine the amount of gratuity. There are certain terms and eligibility criteria that clarify the employees to claim gratuity.
Let’s list a few terms and conditions that clarifies the eligibility criteria of gratuity:
- The employee should be eligible for superannuation. Superannuation is a compulsory scheme wherein the employee has money paid by the employer to financially support them in a time of crisis.
- The second term to claim the gratuity amount is to retire from service.
- The employee has to serve for a continuous period of five or more than five years. If they fail to serve five or more five years of service they may not be eligible to claim gratuity.
- In case of any unfortunate event of the death of the employee, the nominee of the employee receives the amount of gratuity.
How to calculate gratuity?
Calculation of gratuity is done which includes components that consider the amount and the time period. The gratuity calculation formula :
15 X last drawn salary X tenure of working / 26.
The gratuity calculator assists in estimating the amount that an employee will receive, on quitting role or any kind of unforeseen circumstances.
“You must enter the inputs of the last drawn salary and the tenure of continuous service with the company. The last drawn salary includes your basic salary, the dearness allowance, and the commission that you have received from sales.”
This statement highlights the procedure for calculating the gratuity.
Let’s explain with a demo in calculating gratuity :
- The amount of gratuity for the employees who are covered under the Gratuity Payment Act can be calculated with the assistance of the formula :
Gratuity = N X B X15 / 26
In this formula,
N notifies tenure the employee has served in the company.
B notifies the last drawn basic salary + dearness allowance.
For example, if an employee, say XYZ works with a company A for a period of 15 years. Let’s consider the last drawn salary amount and the dearness allowance to be 30,000.
The calculation of the amount of gratuity as = 15 X 30000 X 15 / 26 = 259615.
However, it is imperative to note these two factors:
- As per the Gratuity Payment Act, the amount of gratuity has a tab of 20 lakh. Any amount that exceeds more than 20 lakh is considered ex-gratia.
- The time period the employee has served the organization is calculated in varied ways. For instance, if the employee has served for around 14 years and 3 months. In the calculation of gratuity, the time period is considered 14 years. If the employee has served for 14 years and 7 months the time period is considered as a rounded figure of 15 years.
- The second category wherein the employee is eligible to receive gratuity who are not covered under Gratuity Act. For such employees, the salary amount is considered with half the amount of salary. The formula to calculate the amount is:
(15 X last drawn salary X working tenure)/ 30.
How to use the gratuity calculation formula?
There are certain steps that an employee can follow to calculate the amount of gratuity :
- Enter the basic salary amount on the calculator
- Enter the number of years the employee has served the organization.
- The gratuity calculator online will help in generating the amount that he/she will receive.
- It provides you with the accessibility to recalculate the amount of gratuity at any point in time.
